Why has the Vanguard Diversified High Growth ETF (VDHG) dividend dropped off in 2023?

Interest in one of exchange-traded fund (ETF) provider Vanguard's funds has been growing in 2023. And no, it's not the uber-popular Vanguard Australian Shares Index ETF (ASX: VAS).

But the Vanguard Diversified High Growth ETF (ASX: VDHG) has come down a notch this year so far when it comes to dividend income.

Now, the VDHG ETF is probably not one that many investors buy for dividend income potential alone. You might have guessed that from this fund's name. Income investors that prioritise passive income will probably first opt for the Vanguard Australian Shares High Yield ETF (ASX: VHY), or perhaps even VAS itself, for their penchant for higher dividend income and franking credits.

Not so much for the VDHG ETF, though. The diversified nature of this fund makes dividends a little more sparse. We've discussed the unique makeup of the Vanguard Diversified High Growth ETF before here at the Fool.

But for a refresher, approximately 43% of this fund's underlying portfolio is currently made up of international shares (both currency-hedged and unhedged). Only 35.8% comes from Australian ASX shares. The rest is made up of other asset classes such as fixed-income bonds, emerging markets shares and cash.

International shares typically don't tend to pay out the high dividends that ASX shares are known for. And they don't come with franking credits either.

But still, this ETF has and does pay out dividends to its investors.

Why has the VDHG ETF dropped its ASX income in 2023?

However, the dividend income investors have enjoyed over the past 12 months represents a big drop from what this ETF has paid out over most of last year.

If you want to see for yourself, here's a look at the past four quarters of VDHG's dividends (yes, this ETF pays out quarterly dividend distributions), and how they compare to the preceding quarter's payouts:

As you can see, there's been a big slowdown in the income that this ETF has been forking out of late, with three of the past four quarters recording big drops in dividend income. To sum it up, VDHG units have yielded $1.60 in dividend distributions per unit over the 12 months to 30 June 2023, a fall of approximately 39% from the $2.62 investors enjoyed over the 12 months to 30 June 2022.

To put that in context, that's a drop from a dividend yield of 4.42% to 2.7% at the current VDHG unit price of $59.26 that we see today.

With so many different asset classes under the Vanguard Diversified High Growth ETFs belt, it can be difficult to assess why this dividend cut has occurred. But it's likely that ASX shares are a big factor. As we covered earlier this month with the Vanguard Australian Shares ETF, it's been a tough year for the ASX in terms of dividend income.

Less passive income from Vanguard? Look no further than the ASX

We've seen huge dividend cuts from the big miners on the ASX in particular. The likes of BHP Group Ltd (ASX: BHP), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG) have all cut their dividends substantially over the past year or two. For example, 2021 saw Fortescue fork out a final dividend of $2.11. But 2023's equivalent payment will come in at just $1 per share.

This has flowed through to the VAS ETF, which has seen a 41.5% reduction in dividend distributions in the 12 months to 30 June 2023 compared with the 12 months prior to that.

So this is probably why we have seen a big reduction in the VDHG ETF's dividends on the ASX over the past 12 months. This ETF's international shares' components have actually upped their dividends. But this section of the Vanguard High Growth ETF started from a larger base, so it has likely had less of an impact on the overall income from this ETF than the ASX shares component.

Thus, if you're looking for a culprit for the dropoff in dividend income from the Vanguard Diversified High Growth ETF, look no further than our own ASX.